Market Watch Hometap Home Equity Agreement Explained

Hometap's home equity agreement is a unique way to tap into your home's value without taking out a traditional home equity loan.

The agreement allows you to borrow up to 20% of your home's value, with the option to pay back the loan in installments over time.

Here's how it works: you'll receive a lump sum of cash, and in return, Hometap will receive a percentage of your home's future appreciation.

The amount you borrow is based on the value of your home and the terms of the agreement.

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Hometap's home equity agreement offers a unique way to access cash from your home's value without taking on debt. You can get a pre-qualification estimate from Hometap to determine how much cash you could receive.

The process starts with a home appraisal to determine your property's value. If you qualify, Hometap advances you the money, but they technically own a portion of your home. You don't have to worry about making monthly payments to Hometap.

Instead, you agree to give Hometap a percentage of the future appreciation of your home. This is based on the Share of Home Value Model, where Hometap provides a lump sum of cash in exchange for a minority stake in the future value of your home.

Hometap's terms are often 10 years, but can go up to 30 years. At the end of the agreement term or when you sell the house, you pay back the equity value Hometap gave you plus its share of the home's appreciation. This means that if your home depreciates in value, the percentage owed to Hometap will be less.

Hometap is available in 14 states, making it a viable option for those who want to access cash from their home's value.

Home equity sharing agreements can be a viable option for homeowners in need of cash, but it's essential to understand the pros and cons.

You can access a large lump sum of cash today without worrying about monthly payments, which can be a game-changer for those facing temporary financial difficulties.

However, the amount you receive may not be worth the equity you'll have to give up later, making it a less-than-ideal option for most homeowners.

One major drawback of home equity investments (HEIs) is the uncertainty surrounding the cost, which can be difficult to calculate.

To illustrate this, consider a scenario where you receive a $100k home equity investment on a $1 million home, and your home appreciates 2% per year for 6 years. You'd end up owing Hometap $200,457, giving you an effective annualized interest rate of about 12.3%.

Many HEIs come with origination fees ranging from 2-5% of the total investment, which can be higher than the closing costs of mortgages or HELOCs.

Home equity sharing agreements typically have lower credit score requirements, around 500, compared to HELOCs, which require a credit score of around 640.

Despite the higher effective interest rates, the ability to get a big lump of cash today without worrying about monthly payments can be a compelling option for some homeowners.

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However, you'll likely pay much more than you get, as you'll be giving away a percentage of your future appreciation, which can be a significant drawback.

To put this into perspective, consider a scenario where you borrow $50,000 on a $500,000 home and sell it in 10 years for $593,800. You'd be expected to pay the company $72,100 in appreciation plus the original $50,000 loan, which is significantly more than you'd pay with a home equity loan.

Here's a comparison of the costs:

Keep in mind that an appraisal will determine the value of your home, but that value may be discounted by the investor for risk purposes.

You'll likely pay more than you get with a home equity sharing agreement, as you're signing away a percentage of your future appreciation.

By signing away a percentage of your future appreciation, you could be paying the company far more for the upfront cash than what you would pay a lender for a HELOC or home equity loan. For example, if you borrow $50,000 and sell your home in 10 years for $593,800, you'll have to pay the company $72,100 in appreciation plus the original $50,000 loan.

In contrast, if you got a home equity loan for $50,000 at a 10% interest rate and paid it back in 10 years, you would have paid the lender $29,424 in interest payments. This would require a $662 monthly payment, but the overall savings are significant.

Repayment of the equity investment works in three possible scenarios: if the home appreciates, you pay back the company's "investment" plus its stake in the increased value; if the home's value remains the same, you pay back the equity you drew and may also pay back any risk-adjusted discount; and if the home loses value, you pay back the equity you drew, less an adjustment for the depreciation.

Here's a breakdown of the possible repayment scenarios:

Investors get paid back through a liquidity event, which can mean selling the home, refinancing the mortgage, or taking on a new investor. For example, if Jane sells her house for $1,400,000, the investor is entitled to $140,000 of the proceeds, which is a 7% annualized return.

Investors don't need to directly invest in a home to get exposure to residential real estate.

Returns from indirect investments, like REITs and mortgage-backed securities, are heavily influenced by home prices but not directly determined by them.

In an HEI, returns are usually predicated on a liquidity event, such as selling the home or refinancing the mortgage.

The investor's ownership share can vary, with Hometap typically making an investment equal to 10% of a home's value, but rising to 15% or more on the way out.

The liquidity clock is a crucial feature of HEIs in practice, with the final ownership share depending on when you sell and whether your home has gone up or down in value.

There are two common models for HEIs: the Share of Home Value Model, where the investor provides a lump sum in exchange for a minority stake in the future value of the home, and the model used by Hometap, where the investor provides a lump sum and the homeowner pays an agreed-upon percentage of the current home market value to the investor when the investment's term ends or the house is sold.

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If the home depreciates in value within the term, the percentage owed will be less, and the investor may not make a profit, as seen in the Share of Home Value Model.

Here's a summary of the two models:

Home equity investments offer a unique way to tap into your home's value without borrowing. Most home equity investment providers use one of two models to determine the settlement total: share of home value and share of home appreciation. This option can impact the amount you owe at settlement.

The percentage of the home's future value an investor will receive varies between providers. With some investors, like Hometap, the range is given before any agreement is reached, so there are no surprises. The minimum and maximum investment and settlement amounts will vary by investor.

Investors like Hometap and Equifi partner with individual investors, although specific information on what they offer is more limited. Splitero accepts investor properties owned by trusts and LLCs, which sets it apart from other companies.

Here are some other companies worth considering:

The historical internal rate of return for Hometap is 19% with a five-year track record. They have originated over 10,000 home equity investments and have committed capital from investors like Bain Capital Credit and Delaware Life.

Managing risks is crucial in any investment, and Hometap's home equity agreement is no exception. The company acknowledges that downside risk needs to be baked in to their terms.

Downside risk is particularly relevant for equity investors like those involved in Hometap's agreements, who need to consider the impact of falling or stagnant home prices more than lenders would.

To mitigate this risk, Hometap's terms need to be carefully analyzed.

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As a homeowner participating in a Home Equity Investment (HEI), you may encounter conflicts over control and decision-making with your investor.

You don't need to loop in your investor on every decision about your home, as long as you're paying your mortgages, taxes, and insurance.

Hometap, a specific HEI investor, does not profit from the value added or appreciation earned from renovations, as determined by an appraiser.

They also don't dictate the sale price, except that it must at least approximate market value.

Some investors may be more hands-on than others, so it's essential to review the fine print of your HEI agreement carefully.

Managing downside risk is crucial for equity investors, especially in the context of home equity investments. This involves considering the possibility of falling or stagnant home prices.

To mitigate this risk, HEIs need to bake it in from the start. Hometap, a leading HEI provider, offers real terms that demonstrate this approach.

As an equity investor, you need to consider downside risk to a larger degree than you would with a HELOC. This is because equity investments are more closely tied to the value of the underlying asset.

Hometap's terms show that managing downside risk requires careful planning and consideration. By doing so, investors can minimize potential losses and maximize returns.